Portugal’s progress towards economic convergence with the rest of Europe has diminished in recent years, and in this 2004 review of Portugal’s economy, OECD recommends stepping up growth through policies that raise human capital, encourage the mobility of the labour force, and facilitate innovation and the diffusion of technological advances. Competition needs to be stiffer and the climate for doing business needs to be further improved. This edition’s special feature covers reform of the health care system.

Portugal has the lowest per capita income in the euro area and until the recent enlargement, it also had the lowest in the EU. Brisk growth in the last years of the 20th century led to some convergence with living standards in the more advanced EU countries, largely thanks to the reforms that began some 15 to 20 years ago. Liberalisation of the financial sector, far-reaching privatisation and deregulation, high investment and improved human capital delivered notable results. Falling real and nominal interest rates in the run-up to euro entry fuelled private sector demand and weakened the government’s incentives to control primary spending. This also led to the build up of major imbalances, including a large external ...